By Jon Hood
ConsumerAffairs.com
April 28, 2010
The United States Supreme Court on Tuesday gave the green light to a securities fraud suit alleging that Merck made misleading statements about the safety of the now-defunct arthritis drug Vioxx, causing financial harm to the company's shareholders.
Mississippi Attorney General Jim Hood applauded the decision, which resulted from a case brought by the Public Employees Retirement System (MPERS) of Mississippi and other plaintiffs.
"Rather than rewarding defendants for concealing their wrongful conduct, the Court's decision today will help ensure that defrauded investors will get their day in court, and have their claims decided on the merits," Hood said.
Vioxx was withdrawn from the market in 2004 after it was linked to increased risk of heart attack and stroke. The suit, brought by Merck shareholders, accuses the pharmaceutical giant of making false statements suggesting that the drug was safe, setting the stage for a plunge in stock prices when it was pulled off the market. Merck shares fell 27% on the day the withdrawal was announced, and continued to decrease for several months afterwards.
The court's decision focused on whether the suit was timely filed within the statute of limitations. Most civil cases can only be brought for a certain amount of time; after that, the litigation window shuts and lawsuits are no longer an option.
The law says that shareholders have two years to bring an action alleging that they lost money due to a company's false or misleading statements. Merck initially argued that the statute of limitations had already run, pointing out that the complaint was filed in November 2003, and that the plaintiffs should have been aware of Vioxx's blooming troubles in September 2001. That was when the Food & Drug Administration (FDA) issued its first warnings that Vioxx potentially posed serious risks.
That argument held water with a federal judge in New Jersey, who dismissed the suit in 2007. But the Third Circuit Court of Appeals reversed that decision, ruling that the two-year period begins only when the plaintiffs have actual knowledge that the company was misleading shareholders.
Court upheld Third Circuit
The Supreme Court agreed with that view, holding that the statute begins to run when the plaintiffs did in fact discover, or when a reasonably diligent plaintiff would have discovered 'the facts constituting the violation' -- whichever comes first. The court further said that the 'facts constituting the violation' include the fact of scienter, 'a mental state embracing intent to deceive, manipulate or defraud.'
Many statutes of limitations are tolled -- or stopped -- when the plaintiffs can demonstrate that the defendant fraudulently concealed the behavior for which they are being sued. Thus, for example, a medical malpractice plaintiff may be able to extend the statute of limitations if he can show that his doctor was aware of the alleged negligence and actively tried to conceal it from the patient. The elements necessary to satisfy the fraudulent concealment exception vary, and many statutes of limitations are governed by state law.
The unanimous opinion, already a rare sight, was especially remarkable given the subject matter of the case. Six of the current nine justices were appointed by Republicans, typically not viewed as a party with a special fondness for class action lawsuits.
A statement by Merck Executive Vice President and General Counsel Bruce Kuhlik describes the company as disappointed in today's decision but said it believes that the allegations in the complaint are unfounded and will continue to defend itself vigorously.
Merck has good reason to fight the suit as aggressively as possible. The company already paid nearly $5 billion into a settlement fund for patients who say they suffered heart attacks or strokes as a result of taking Vioxx.
Merck, the world's second-largest drug company by sales, has reported around $40 billion in revenue since last November.
---Mississippi Attorney General Jim Hood is not related to reporter Jon Hood.
